Level of stock market margin debt in 2013 exceeds 1999 and 2007

The thing that promotes panics and stock market crashes is not somemajor decision by investors en masse to sell everything foremotional reasons. There may be an initial emotional panic, but whatkeeps it going is deleveraging of margin debt causing forced selling.People who had borrowed money to purchase stocks start receivingmargin calls, forcing them to sell more, causing a vicious downwardspiral. Margin debt reached astronomical levels just beforethe 1929 crash, in 1999 just before the Nasdaq crash of 2000,in in 2007, just before the financial crisis.

In another sign that a stock market crash is approaching, margin debthas rebounded, and is once again at astronomical levels, higher thanin 1999 or 2007, as you can see from the above graph. As I’ve writtena number of times in the last four months (see “23-Jun-13 World View — The ‘experts’ scramble to explain the stock market plunge”), Wall Street stock priceshave been increasing so quickly that they’ve become dangerouslyparabolic. The recent rapid increase in margin debt explains theparabolic rise.

For more information on how margin debt works today, see my article onInteractive Brokers ( How margin accounts work today versus 1929). You can borrow $1 million at1.3% interest, and you can use it to invest in the stock market,presumably in stocks that yield over 5%. That’s sounds good when youlisten to their ad, but once your stock going down a little, you veryquickly start receiving margin calls, and you have to sell your assetsat a loss. If that happens to enough investors at the same time –and the rapid rise in margin debt indicates that it will — thenforced selling causes a vicious downward spiral. Pragmatic Capitalism

Taliban jailbreak is new humiliation for Pakistan

Monday’s jailbreak in Pakistan, after an attack by 100 PakistanTaliban (TTP) terrorist militants, freed 248 convicted prisoners, farmore than the “dozens” that we reported yesterday, including a few dozen hardcore terrorists.The police who were supposed to be protecting the prison dropped theirweapons and ran when the militants attacked. The police “are corrupt,lazy and unprofessional,” according to a police source.

Even worse, authorities had advance warning of the attack, but did notact on it, leading to not-very-farfetched speculation that the prisonguards were complicit in the jailbreak. This would not be surprising,inasmuch as Osama bin Laden lived openly in Abbottabad, Pakistan, forten years, with the apparent complicity of Pakistan’s army andintelligence services, resulting in the greatest humiliationfor Pakistan in decades.

Pakistan’s new prime minister Nawaz Sharif had promised to endterrorist attacks by the Taliban by simply negotiating with theTaliban, possibly freeing some prisoners in exchange for guarantees toend the terrorist attacks. It’s now clear that TTP has decided tofree the prisoners on their own, leaving Sharif no negotiatingleverage.

The whole idea was silly, anyway. The TTP subsidiary,Lashkar-e-Jhangvi (Lej), was never going to agree to end theirmultiple terrorist attacks whose objective is to exterminate all Shiasin Pakistan.

The other relevant issue is that Sharif had promised to end U.S.drone strikes on Taliban militants, in the hope that doing so wouldmotivate the TTP to stop their terrorist attacks. That was a sillyidea too. BBC and